In the software world, categories like ERP (enterprise resource planning) and CRM (Customer Relationship Management) have created tremendous value, as seen with the success of companies like Salesforce.com and Workday.
But there’s a new category emerging: Relationship Business Management, or RBM. Forbes likes to call it “what comes after ERP and CRM.” Think of this as essentially using new technologies to transform business models.
As your business joins the subscription economy, you need a new business model, one whose focus shifts from one-time transactions to long-term, recurring customer relationships.
But this shift requires new data-centric ways of thinking, and comes with real challenges for many companies. Pricing structures, enterprise billing models, and accounting needs will change dramatically. New metrics about how you relate to your customers, including upsell, cross-sell, retention, and renewal, will be critical to measure and track.
This course will cover how your business can shift to the new focus on relationships to ensure your subscription model success.
Your ERP served you well when your business was built on one-time transactions. It told you what your profits were, and how much product you were shipping. But it simply isn’t designed for the ever-changing needs of a subscription business that is built on evolving customer relationships.
For example, a subscription-based company needs a way to offer flexible pricing and packaging offerings, manage recurring invoices, and effectively integrate with your general ledger to handle downstream financial system impact like recurring revenue recognition. You also need to empower customers to manage their own subscription relationship with you.
A Relationship Business Management system is an entirely different animal. It was developed specifically to meet the needs of the subscription economy and track the customer-centric data that success requires.
One of the first lessons you likely learned when you were starting out in business was that acquiring new customers is central to a business’ growth and success. A thriving subscription-based business takes the customer-centric model even further. Its success depends on recurring revenue that you earn from existing customers.
Part of the reason is that it is six to seven times more expensive to acquire a new customer than to retain an existing one, according to a recent Bain study. And multiple analysts have found that it takes just over three years, on average, for an existing customer to become profitable and for you to recoup your initial cost to acquire them.
The traditional product economy has a core set of processes that most business people are familiar with. The most common – and most easily recognizable – is the order-to-cash process. In the subscription economy, this process becomes much more complex, because it includes renewals, suspensions, mid-cycle upgrades, downgrades, add-ons, and cancellations. A key component to managing all of this complexity is having the ability to implement flexible pricing and packaging.
Flexible Pricing and Packaging is Critical
Amazon Web Service has changed its prices 42 times since its launch in 2006.
When you first launch a subscription offering, your primary growth strategy will likely center on acquiring new customers. At this stage, pricing might be simple, with one or two pricing options. As your company grows, you will want to offer different editions of your product to entice customers to add new services as their needs increase so you can recoup their acquisition costs. You could also offer an edition with fewer services to meet the needs of customers who find they require less.
The need for new pricing options will also likely arise if and when you need to keep your customers from leaving you for the new kid on the block that’s offering a good value at a lower price. Either way, you need a system that can provide pricing and services that meet your customers’ needs. Amazon Web Services, for example, has changed prices dozens of times since launching its cloud service in 2006 (see above). Box, the successful online file sharing firm, has experimented with its pricing on a similar scale to target new enterprise segments.
It was designed to manage pricing for one-time sales of products and SKUs, not service plans. And it can’t begin to handle complexities like testing new price offerings, or multiple pricing options. If you do try to implement new pricing strategies through your legacy in-house billing system, like InsideView did when it launched its subscription business, (see case study) you’ll find it’s a cumbersome, time-consuming endeavor. It’s also expensive, since you’ll need to invest considerable developer resources to make any changes. ERP systems just weren’t built to nimbly handle new pricing fluctuations.
Do let your business goals drive your pricing
Do implement a comprehensive, flexible Relationship Business Management (RBM) solution. RBM is built to meet the needs of your customer and gives you the flexibility of dynamic packaging and pricing of services to drive your growth strategies. With the right platform, you can configure unlimited pricing and packaging that lets you set up pricing per user or pay-as-you-go, account for overages, and make other real-time changes. Instead of having your back office processes drive your pricing strategy, your business goals can take the reins, so that you’re nimble and able to respond to competitive threats or the addition of new product lines.
Don’t make billing mistakes
Make sure your system can handle the various pricing structures that reflect a customer’s purchases, whether that’s upgrading from freemium, opting for a new trial offer, or adding multiple accounts. These options must be reflected in a sophisticated accounting system that can create an accurate bill. If the bill is too high, your customer is not going to pay it and they’ll be upset about the mistake. If it’s too low, your company will lose money.
Do keep your freedom to Innovate
The traditional product economy has a core set of processes that most business people know, like the very linear order-to-cash process. In the subscription economy, the order-to-cash process becomes much more complex, with renewals; suspensions; mid-cycle upgrades or add-ons; and cancellations. The beauty is that these choices give you the freedom to innovate. Your ERP won’t be able to handle the complexity of your recurring revenue management operations – but a RBM solution can.
In the traditional product economy, businesses rely on financial statements with line items such as expenses, revenue, and number of products sold to gauge their economic health. They look back on a period that already occurred, and can’t distinguish between recurring revenue and one-time revenue. As a result, they can’t reliably project how much revenue to expect in the next pay period.
But as a subscription business, you can anticipate how much recurring revenue you will earn in the next fiscal period from your installed base.In most companies, this is designated as annual recurring revenue (ARR), but it can also be tracked as monthly recurring revenue (MRR) or quarterly recurring revenue (QRR). But you also have to factor in a certain churn percentage. It’s essential to include churn in the calculation because inevitably, even if you offer the best service and the best value in the market, you’ll still have some customers that leave. Any financial statement for a subscription business needs to subtract out churn from ARR.
Another metric that subscription businesses use to measure success is recurring profit margin, which indicates the difference between recurring revenues and recurring costs (the ongoing costs to deliver the service, such as datacenter, G&A, etc). The larger your recurring margins, the more the business can either book as profit or invest in one-time growth expenses.
The final metric on a subscription business financial statement should be the growth efficiency ratio, which shows how much new recurring revenue the company earns with a given investment in sales and marketing. Every subscription business will invest in sales and marketing to drive net new recurring revenue, either through acquiring new customers or increasing the lifetime value of a customer.
“It’s just not natural for a traditional accounting system to be able to manage subscriptions.” Lisa Bailey, VP of Business Operations of InsideView
A traditional ERP system wasn’t built to calculate these new metrics. While an ERP system’s reporting and general ledger modules are useful for producing traditional financial statements, they can’t provide insight into the new subscription economy metrics like recurring revenue, churn and growth efficiency.
A comprehensive RBM system works hand in hand with your general ledger and CRM system so you can monitor and measure the right metrics to optimize your subscription business. In other words, it’s the customer-centric approach you need to enable dynamic packaging and pricing of services to drive your growth strategies.
InsideView is a Software as a Service company that gives users insider sales intelligence, up-to-date contacts, and real-time alerts through public, editorial, and social media content. For example, it aggregates LinkedIn, Facebook, Outlook, existing customers, and personal contacts – all within a cloud accessible only within your company. InsideView’s software has been essential for many sales companies as they move to build a client list, develop leads and grow customers.
Their product is sold by the seat, so customers can increase seats, decrease seats, request a better seat price and or a longer term agreement. All of those adjustments require a flexible, scalable billing platform.
Founded in 2005, the company grew rapidly. It soon became obvious that its in-house billing system—a combination of Quick Books and Excel spreadsheets – couldn’t accommodate the pricing and billing flexibility that the new subscription business model needed to thrive. Essential data was falling through the cracks, including renewals, meaning that InsideView was leaving money on the table. “It’s just not natural for a traditional accounting system to be able to manage subscriptions,” explained Lisa Bailey, VP of Business Operations of InsideView.
The solution? A Relationship Business Management (RBM) system that works with InsideView’s multi-faceted pricing strategy. Now, Bailey’s team can add new products, make changes to pricing, and launch pricing experiments. “So if Marketing comes to me and says, ‘We want to implement a new product, and it’s going to be this new price point, you know, how long is it going to take?’ I can say, you know, ‘No time at all,’ because it’s very easy to make pricing changes,” says Bailey.
Account visibility—imperative to successful customer management–has also reached a new level. The RBM system enables everyone in the organization who has a Salesforce license to see a customer’s subscription status and what’s been invoiced and paid. The new system has been a boon to the company—especially as its installed base of users has increased more than fifty percent since March 2013. Instead of scrambling to make its ERP work, the new seamless approach reduces errors and headaches, enabling InsideView to focus on growing relationships with the 19,000 enterprises it counts as customers.